Oil Market Forecast - May 2021
Summary
This May edition of our Oil Market Forecast sees OPEC+ steadily return production to market as COVID 19 cases surge in India. Meanwhile, cases in the USA and UK continue to decline to the point where mask mandates and travel restrictions are being lifted. All major forecasting institutions continue to predict a strong second half recovery in oil demand.
A few key points:
- The oil market is expected to remain in deficit through the rest of the year, as OPEC+ relax their supply curbs and demand recovers.
- Demand growth forecasts have been consistently robust for the second half of the year, despite uncertainties surrounding the trajectory of recovery from COVID 19.
- A sudden return of Iranian crude to market is the most likely event to upset the supply and demand balance.
- We expect global crude storage to fall back to its long term average by the end of the year.
- Brent and WTI spot prices continue to rise with Brent briefly touching $70/barrel earlier this month.
- Both Brent and WTI futures continue to rise.
- US rig count continues to grow but shows no sign of acceleration. We predict US Production will fall again this year.
Oil Supply and Demand
The IEA (1) reported global crude oil supply rising to 93.4 MMbbl/day in April, while the EIA (2) reported supply at 96.2 MMbbl/day for the same month. We estimate global crude oil supply at 94.2 MMbbl/day in May, with the biggest increment coming from the return of Saudi Arabia’s production to the market.
OPEC reaffirmed their plan to gradually return production to the market at their 16th OPEC and non OPEC ministerial meeting on 27th of April (3). This agreement details production levels through July 2021 and maintains the market on the deficit side of balance, even with significant non-compliance by some of the non-OPEC nations, most notably Russia.
As discussed later in this forecast, we expect US production to continue its decline, despite a resurgence in prices. A return of Libyan production has now been accounted for; the real uncertainty remains Iran. Iran has been steadily increasing exports to China over the last few months. Iran is currently producing around 2 MMbbl/day and has a theoretical capacity of around 3.8 MMbbl/day, most of which could be brought back on stream within a few months. Iran is exempt from current OPEC and non OPEC production quotas and the quick return of ~ 1.5 MMbbl/day to the market could upset the delicate balance that OPEC has successfully achieved over the last year. Our models assume Iranian increasing gradually back to 3.5 MMbbl/day through 2024. A faster return would require OPEC+ to reverse course or push the oil market back to surplus.
Oil demand continues to recover despite the resurgence of COVID 19 in India in particular. The IEA is predicting a jump of nearly 3 MMbbl/day in demand between Q2 and Q3 this year as economies recover and people return to work and start traveling again. The IEA, EIA and OPEC have been making small demand adjustments through the first half of the year, but generally demand is expected to have returned to near 2019 levels by the end of this year.
We expect demand to continue to rise through the rest of the decade, with the market showing a small surplus in 2022 as OPEC and non OPEC nations unwind their supply curbs, before shifting back to deficit in 2023 and beyond. Our supply and demand forecast is shown in Figure 1.
Figure 1 - Supply and Demand Surplus Forecast
Oil Storage
The IEA predicts a small production surplus in May in their latest forecast. Our model shows a small deficit in May, but a small surplus in June. Both forecasts then show a deficit for the rest of the year. We estimate global oil inventory drawdowns of 86 million barrels and 21 million barrels in the first and second quarter of 2021 respectively. The second quarter figure is markedly lower than the 144 MMbbl/day that we predicted for Q2 in last month’s report; the change is driven by higher than anticipated April supply. Draws are forecast to continue at an average of 74 MMbbl/month for second half of 2021.
Figure 2 shows global storage capacity and inventories. If supply and demand continue to evolve as currently forecast, global inventories should return to long term average around the third fourth quarter of this year and stay around that level through 2022. Beyond 2022, they are set to decline significantly in the absence of new investment.
Figure 2 - Global Storage Chart
Oil Prices
WTI is currently hovering around the $65 per barrel level and Brent touched $70 per barrel earlier this month. Both Brent and WTI futures curves have moved upwards over the last month, with the sharpest increases seen over the near term.
Brent futures are now above $60/barrel out to 2023, while WTI futures are above $55/barrel over the same period.
Figure 3 - Brent Crude Oil Futures
Figure 4 - WTI Crude Oil Futures
This increase in prices is feeding through the industry, with the major international oil companies all reporting a first quarter rebound in profitability. Rystad Energy (4) published a report that claimed the US shale industry hit record revenue in the first quarter, on a pre-hedged basis. Unfortunately, as reported by Reuters (5), many producers hedged at prices below $50 per barrel and so the industry has not benefited from the resurgence in prices to the extent expected.
US Activity
US land oil rig counts continued to climb in May, rising from 332 on the 16th of April to 337 on the 14th of May. The rate of rig count growth remains steady, with no sign of an acceleration in rate of increase of activity. Historic and forecast rig counts are shown in Figure 5.
We expect this subdued return to rig activity to limit US production, which our model shows falling to an average of 15.8 MMbbl/day in 2021, from 16.5 MMbbl/day in 2020.
Figure 5 - US Land Oil Rig Count
(1) Oil Market Report – May 2021, International Energy Agency
(2) Short Term Energy Outlook (STEO), May 11th, 2021, U.S. Energy Information Administration.
(3) OPEC Press Release No 11/2021, Vienna, Austria, 27th April 2021
(4) U.S. Shale Pre-Hedge Revenues Set to Hit All-Time High In 2021, Rystad Energy, May 6th, 2021.
(5) Missed opportunity: hedges to crimp U.S. shale oil producers Q1 profit., Reuters, Liz Hampton, April 26th, 2021.
Oil Market Forecast - May 2021
Summary
This May edition of our Oil Market Forecast sees OPEC+ steadily return production to market as COVID 19 cases surge in India. Meanwhile, cases in the USA and UK continue to decline to the point where mask mandates and travel restrictions are being lifted. All major forecasting institutions continue to predict a strong second half recovery in oil demand.
A few key points:
- The oil market is expected to remain in deficit through the rest of the year, as OPEC+ relax their supply curbs and demand recovers.
- Demand growth forecasts have been consistently robust for the second half of the year, despite uncertainties surrounding the trajectory of recovery from COVID 19.
- A sudden return of Iranian crude to market is the most likely event to upset the supply and demand balance.
- We expect global crude storage to fall back to its long term average by the end of the year.
- Brent and WTI spot prices continue to rise with Brent briefly touching $70/barrel earlier this month.
- Both Brent and WTI futures continue to rise.
- US rig count continues to grow but shows no sign of acceleration. We predict US Production will fall again this year.
Oil Supply and Demand
The IEA (1) reported global crude oil supply rising to 93.4 MMbbl/day in April, while the EIA (2) reported supply at 96.2 MMbbl/day for the same month. We estimate global crude oil supply at 94.2 MMbbl/day in May, with the biggest increment coming from the return of Saudi Arabia’s production to the market.
OPEC reaffirmed their plan to gradually return production to the market at their 16th OPEC and non OPEC ministerial meeting on 27th of April (3). This agreement details production levels through July 2021 and maintains the market on the deficit side of balance, even with significant non-compliance by some of the non-OPEC nations, most notably Russia.
As discussed later in this forecast, we expect US production to continue its decline, despite a resurgence in prices. A return of Libyan production has now been accounted for; the real uncertainty remains Iran. Iran has been steadily increasing exports to China over the last few months. Iran is currently producing around 2 MMbbl/day and has a theoretical capacity of around 3.8 MMbbl/day, most of which could be brought back on stream within a few months. Iran is exempt from current OPEC and non OPEC production quotas and the quick return of ~ 1.5 MMbbl/day to the market could upset the delicate balance that OPEC has successfully achieved over the last year. Our models assume Iranian increasing gradually back to 3.5 MMbbl/day through 2024. A faster return would require OPEC+ to reverse course or push the oil market back to surplus.
Oil demand continues to recover despite the resurgence of COVID 19 in India in particular. The IEA is predicting a jump of nearly 3 MMbbl/day in demand between Q2 and Q3 this year as economies recover and people return to work and start traveling again. The IEA, EIA and OPEC have been making small demand adjustments through the first half of the year, but generally demand is expected to have returned to near 2019 levels by the end of this year.
We expect demand to continue to rise through the rest of the decade, with the market showing a small surplus in 2022 as OPEC and non OPEC nations unwind their supply curbs, before shifting back to deficit in 2023 and beyond. Our supply and demand forecast is shown in Figure 1.
Figure 1 - Supply and Demand Surplus Forecast
Oil Storage
The IEA predicts a small production surplus in May in their latest forecast. Our model shows a small deficit in May, but a small surplus in June. Both forecasts then show a deficit for the rest of the year. We estimate global oil inventory drawdowns of 86 million barrels and 21 million barrels in the first and second quarter of 2021 respectively. The second quarter figure is markedly lower than the 144 MMbbl/day that we predicted for Q2 in last month’s report; the change is driven by higher than anticipated April supply. Draws are forecast to continue at an average of 74 MMbbl/month for second half of 2021.
Figure 2 shows global storage capacity and inventories. If supply and demand continue to evolve as currently forecast, global inventories should return to long term average around the third fourth quarter of this year and stay around that level through 2022. Beyond 2022, they are set to decline significantly in the absence of new investment.
Figure 2 - Global Storage Chart
Oil Prices
WTI is currently hovering around the $65 per barrel level and Brent touched $70 per barrel earlier this month. Both Brent and WTI futures curves have moved upwards over the last month, with the sharpest increases seen over the near term.
Brent futures are now above $60/barrel out to 2023, while WTI futures are above $55/barrel over the same period.
Figure 3 - Brent Crude Oil Futures
Figure 4 - WTI Crude Oil Futures
This increase in prices is feeding through the industry, with the major international oil companies all reporting a first quarter rebound in profitability. Rystad Energy (4) published a report that claimed the US shale industry hit record revenue in the first quarter, on a pre-hedged basis. Unfortunately, as reported by Reuters (5), many producers hedged at prices below $50 per barrel and so the industry has not benefited from the resurgence in prices to the extent expected.
US Activity
US land oil rig counts continued to climb in May, rising from 332 on the 16th of April to 337 on the 14th of May. The rate of rig count growth remains steady, with no sign of an acceleration in rate of increase of activity. Historic and forecast rig counts are shown in Figure 5.
We expect this subdued return to rig activity to limit US production, which our model shows falling to an average of 15.8 MMbbl/day in 2021, from 16.5 MMbbl/day in 2020.
Figure 5 - US Land Oil Rig Count
(1) Oil Market Report – May 2021, International Energy Agency
(2) Short Term Energy Outlook (STEO), May 11th, 2021, U.S. Energy Information Administration.
(3) OPEC Press Release No 11/2021, Vienna, Austria, 27th April 2021
(4) U.S. Shale Pre-Hedge Revenues Set to Hit All-Time High In 2021, Rystad Energy, May 6th, 2021.
(5) Missed opportunity: hedges to crimp U.S. shale oil producers Q1 profit., Reuters, Liz Hampton, April 26th, 2021.
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